Education Stocks Sag As Markets Stay in Bearish Mode

To critics who decry the for-profit education industry, shareholders
in publicly traded companies that make up the sector can raise this
defense: We're not exactly getting rich from our investments.

A look at
the stocks of a selection of K-12 education companies shows that most
have performed poorly this year. Some, such as the school management
company Edison Schools Inc., have been downright abysmal, while a
handful had racked up modest year-to-date gains in their share prices
through late last month. (See table.)

Of course, the major stock market indices have also been on a
downslide for most of the year and had an especially rough summer
before beginning to rebound in recent weeks. The summer was also marked
by the first new public offering of stock by an education company in
many months, and by a private buyout of one K-12 school manager that
will take it out of the public markets.

The group of 12 stocks examined by Education Week, which
includes school managers, educational software suppliers, tutoring and
test-preparation providers, publishers, and others, was down 14.6
percent from the beginning of the year through Aug. 23. The Dow Jones
industrial average was down 11.5 percent in that period, while the
Standard and Poor's 500 index was down 18 percent. The composite of the
Nasdaq stock market, where 11 of the 12 stocks on the list trade, was
down 29.2 percent in the same period.

"K-12 stocks have had an awful year, in part driven by the general
market and in part by some company-specific issues," said Howard M.
Block, an analyst who follows education companies for Banc of America
Securities in San Francisco.

Stocks Left Behind

ThinkEquity Partners, an investment company based in Minneapolis,
publishes a weekly newsletter tracking several sectors of education
stocks. Its K-12 index, which includes a broader roster of companies
than the dozen mentioned above, is down 39 percent for the year.

"At the beginning of the year, there was a sense that the Bush
education bill was going to carry the whole group to bigger and better
things," said Trace Urdan, a ThinkEquity analyst, referring to the "No
Child Left Behind" Act of 2001. "The companies, by and large, have not
lived up to expectations."

The only investment bright spot in education is in the postsecondary
sector. For-profit higher education companies such as Corinthian
Colleges, Strayer Education, and Apollo Group, which operates the
University of Phoenix campuses, have seen significant gains in their
stock prices. The sector has posted gains of about 15 percent this
year, according to ThinkEquity Partners.

One K-12 company has decided it would be better off getting out of
the public stock market. Nobel Learning Communities Inc., a West
Chester, Pa.- based manager of 176 private schools and charter schools,
announced last month a management-led buyout that would take the
company private.

Nobel said on Aug. 6 that senior managers of the company would team
up with two investment firms, Gryphon Partners II LP and Cadigan
Investment Partners, to pay $7.75 a share for Nobel in a deal worth
$110 million. That price was 32 percent above Nobel's Aug. 5 closing
price of $5.85 a share.

A.J. "Jack" Clegg, the chairman and chief executive officer, said
the main reason behind taking Nobel private was that "the market has
just not reacted to the company, to its earnings, or to its position in
the marketplace."

"We had all the disadvantages of being public, yet none of the
advantages," he added. Nobel spent about $500,000 a year to comply with
federal reporting requirements and other demands on public companies,
but did not have easier access to capital because of the company's
relatively low valuation by the market, he said.

Adam Newman, the research director at Eduventures Inc., a Boston
research firm that specializes in the education industry, said Nobel's
decision to go private was probably the right move.

"At the end of the day, there was not a lot of [trading] volume
around this stock," he said. "This recapitalization will give them some
new momentum."

New Offering

Meanwhile, in late July, the educational toy company LeapFrog
Enterprises Inc. had what was viewed as a successful initial public
offering of stock amid a rocky market. The Emeryville, Calif.-based
company is best known for its popular LeapPad, an interactive learning
device that can be updated with new content in reading, math, and other
subjects.

The 7-year-old company is part of the Knowledge Universe stable of
education concerns owned by the financier Michael R. Milken, his
brother, Lowell J. Milken, and Lawrence J. Ellison, the chief executive
of Oracle Corp. Even after raising some $117 million by offering 75
percent of the company at $13 a share, Knowledge Universe retains
voting control of the company.

The company earns most of its revenues from sales to consumers at
toy stores and other retail outlets, with sales of $313 million last
year. In 1998, it formed the LeapFrog Schoolhouse division to sell
products to schools.

"We want to be perceived as an education company," said Robert
Lally, the division president. "A lot of toy companies are driven by
movie-character licensing or by fads such as Furby dolls. Our product
line teaches such fundamental skills that they are more of an
evergreen."

Shares of LeapFrog jumped to a close of $15.85 in their first day of
trading on the New York Stock Exchange on July 25 and were trading at
more than $17 late last month.

Funding for the Business page was provided in part by the Ford
Foundation.

Vol. 22, Issue 1, Page 8

Published in Print: September 4, 2002, as Education Stocks Sag As Markets Stay in Bearish Mode

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